Method and system for providing an automated auction for internalization and complex orders in a hybrid trading system

ABSTRACT

A method of providing an automated auction for internalization for the purchase or sale of securities or derivatives in an exchange is disclosed. The method may include receiving an order at an electronic trade engine, disseminating a request for price message to at least one user in response to receiving the order, receiving a one-sided response message representative of a participant-type in response to the request for price message, selecting an allocation algorithm from a plurality of allocation algorithms, initiating the selected allocation algorithm and allocating the order according to the participant-type upon termination of the selected auction. The system may include an electronic trading engine configured to disseminate an auction message in response to an order, a database of allocation algorithms, and a trade processor for initiating an auction according the one of the allocation algorithms and terminating the auction upon defined early termination events.

CROSS-REFERENCE TO RELATED PATENT APPLICATIONS

This application is a Continuation-In-Part of pending U.S. applicationSer. No. 10/423,201, filed Apr. 24, 2003, and claims the benefit ofpending U.S. Provisional Application No. 60/632,726, filed Dec. 1, 2004.Both of the aforementioned applications are incorporated herein byreference in their entirety.

TECHNICAL FIELD

The present invention relates to the trading of securities orderivatives, such as options or futures. More particularly, the presentinvention relates to an exchange system and method for providing anautomated auction for internalization and complex orders in a system ofconcurrent trading of securities or derivatives through both electronicand open-outcry trading mechanisms.

BACKGROUND

The introduction of electronic trading mechanisms into exchanges forsecurities and derivatives has been an ongoing process. The desire forimmediacy of order execution and dissemination of information is apredominant reason for the steady substitution to electronic mechanisms.As trading volume continues to grow, along with the accompanying needfor an increasingly efficient trading environment, the move towardelectronic trading mechanisms is favored.

Electronic exchanges, while efficient and nearly instantaneous, do notnecessarily provide for the automated auction for internalization andcomplex orders as is done in traditional, open outcry tradingenvironments. Presently, on some exchanges, such as the Chicago BoardOptions Exchange, complex orders and internalized orders are traded inopen outcry. Other all-electronic exchanges have automated thisfunctionality in efforts to attract order flow. It is desirable for anexchange utilizing an open outcry component to provide an auctionmechanism for internalization and complex orders, including those withstock, as well as for simple orders.

Accordingly, there is a need for an exchange system and method that canaddress the drawbacks of both traditional open outcry exchanges andelectronic exchanges as they pertain to the trading of simple orders,complex orders and internalized orders.

SUMMARY

In order to address the need for improvements on electronic tradingmechanisms, a trading platform and method is disclosed herein thatprovides for the automated auction for internalization, complex ordersand simple orders in a system of concurrent trading of securities orderivatives through both electronic and open-outcry trading mechanisms.

According to a first aspect of the invention, method of providing anautomated auction for internalization for the purchase or sale ofsecurities or derivatives in an exchange configured for tradingsecurities or derivatives is provided. The method includes receiving anorder at an electronic trade engine, disseminating a request for pricemessage from the electronic trade engine to at least one user inresponse to receiving the order, receiving a one-sided response messagerepresentative of a participant-type at the electronic trade engine inresponse to the request for price message from the at least one user,selecting an allocation algorithm from a plurality of allocationalgorithms, each allocation algorithm representative of an auction-typeand having at least one starting price associated therewith, initiatingthe selected allocation algorithm, wherein the auction occurs for aperiod between M and N seconds, and allocating the order according tothe participant-type upon termination of the selected auction.

In another aspect of the invention, method of auctioning complex ordersfor the purchase or sale of securities or derivatives in an exchangeconfigured for trading securities or derivatives by a combination ofelectronic and open-outcry trading mechanisms is disclosed. The methodincludes receiving a complex order at an electronic trade engine, addinga top-of-the-spread market to the complex order, verifying the complexorder qualifies for auction, disseminating a request for price messagefrom the electronic trade engine to at least one user, receiving atwo-sided response message comprising a participant-type at theelectronic trade engine in response to the request for price messagefrom the at least one user, selecting a starting price for the auction,the starting price equal to the better of an exchange market spread, acustomer limit price or a limit price on any resting spread order,initiating the auction substantially instantaneously upon receipt of thetwo-sided response message, wherein the auction occurs for a periodbetween M and N seconds, and allocating the complex order based onparticipant-type priority.

In yet another aspect of the invention, a method for providing anautomated auction for the purchase or sale of securities or derivativesin an exchange configured for trading securities or derivatives in anexchange configured for trading securities or derivatives is described.The method includes receiving an order at an electronic trade engine,disseminating an auction message to all market makers quoting a class inresponse to receiving the order, initiating an auction for the orderwhen the size from a market maker is sufficient to fulfill a firm quoteobligation, prohibiting the market maker quoters in a series from movingquotes on the side being auctioned, and wherein the auction terminatesprior to an auction expiration upon an occurrence of an earlytermination event.

In still another aspect of the invention, a method of providing anautomated auction for complex orders for the purchase or sale ofsecurities or derivatives in an exchange configured for tradingsecurities or derivatives is disclosed. The method includes receiving anorder at an electronic trade engine, disseminating a request for pricemessage from the electronic trade engine to at least one user inresponse to receiving the order, receiving a two-sided response messagecomprising a participant-type at the electronic trade engine in responseto the request for price message from the at least one user, selectingan allocation algorithm from a plurality of allocation algorithms, eachallocation algorithm representative of an auction-type and having atleast one starting price associated therewith, initiating the selectedallocation algorithm, wherein the auction occurs for a period between Mand N seconds, and allocating the order according to theparticipant-type upon termination of the selected auction.

BRIEF DESCRIPTION OF THE DRAWINGS

For the purpose of facilitating an understanding of the subject mattersought to be protected, there is illustrated in the accompanyingdrawings an embodiment thereof, from an inspection of which, whenconsidered in connection with the following description, the subjectmatter sought to be protected, its construction and operation, and manyof its advantages should be readily understood and appreciated.

FIG. 1 is a diagram of a hybrid exchange system merging screen-basedelectronic orders with traditional open-outcry floor trading.

FIG. 2 is a block diagram of the electronic trading engine of FIG. 1.

DETAILED DESCRIPTION OF THE DRAWINGS AND THE PRESENTLY PREFERREDEMBODIMENTS

A system and method for providing an automated auction forinternalization and complex orders in a system of concurrent trading ofsecurities or derivatives through both electronic and open-outcrytrading mechanisms is described herein.

Referring to FIG. 1, one embodiment of an exchange system combiningaspects of electronic, screen-based trading with traditional,open-outcry trading suitable for implementing various securities andderivatives trading methods described herein is illustrated. The system10 receives order information for the purchase or sale of securities,for example derivatives such as stock options, from numerous sources ata central order routing system (ORS) 12. ORS 12 may be any of a numberof data processing systems or platforms capable of managing multipletransactions, as are well known in the art. For example, in oneembodiment, the order routing system can be implemented on a transactionprocessing facility (TPF) platform manufactured by IBM Corporation. Forpurposes of clarity, the examples herein will refer specifically tooptions. It should be understood that the system and methods disclosedherein might be applied to the trading of other types of securities andderivatives.

Accordingly, an exchange utilizing the system and methods describedherein may manage a number of classes of derivatives, where each of theplurality of classes of derivatives are associated with an underlyingasset such as a stock, a bond, a note, a future, an exchange tradedfund, an index, a commodity or other known asset types.

Information, such as orders may be entered into the ORS 12 from remotemember firm systems 14, from member firm's booths 16 physically locatedat the exchange system 10 and from market makers 18 present on thetrading floor of the exchange. The member firm systems 14 may be locatedremotely from the geographical location of the exchange and use any of anumber of standard landline or wireless communication networks to directorders electronically to the ORS 12. The member firm systems 14communicate with one of several interfaces or protocols for transmittingtheir orders to the ORS 12. Examples of suitable interfaces are thoseusing a distributed object interface based on the CORBA standard andavailable from the Object Management Group. Interfaces such as financialinformation exchange (FIX), which is a message-based protocolimplemented over TCP/IP available from FIX Protocol, Ltd., or otherknown securities transaction communication protocols are also suitableprotocols. In some instances, orders may even be made by telephone callsor facsimile transmissions directly to the booths 16 of member firms atthe exchange. Orders submitted from a booth 16 at the exchange may comefrom a booth entry and routing system (BERS) 20 or a booth automatedrouting terminal (BART) 22.

The BERS 20 is a computer workstation that provides firm staff membersat the booth with an entry template and a graphic user interface with anumber of function buttons arranged on the display. Orders entered atthe booth through BERS 20 typically consist of orders that weretelephoned to the booth and orders that were wired to member firm-ownedhouse printers in the booth. The orders entered through BERS are done somanually by booth staff using an order template and graphic userinterface on the workstation. Generally, an order entered at BERS 20will be routed to the ORS 12. Member firms, however, may specify that aparticular order entered through BERS be routed to the BART 22 device.The BART 22 device, sometimes referred to as the “electronic runner,”allows member firms to maintain more control over their order flow. BART22 allows each firm to customize certain ORS 12 parameters to route acertain portion of their order flow to the firm booth. For example,firms may instruct ORS 12 to send certain orders directly to theirbooths 16 based on the size of the order.

As with the BERS 20, BART 22 may be implemented on a touch-screenworkstation located in the member firm booth. The BART 22 operator atthe booth may electronically forward orders to desired destinations.Potential destinations for these booth-routed orders are the ORS 12, theelectronic trade engine 24 in communication with the ORS 12, or thepublic automated routing (PAR) system 26 used by the floor brokers atthe exchange. The PAR system 26 may be implemented as a PC-based,touch-screen order routing and execution system accessible by floorbrokers on the floor of the exchange.

It is preferred that the PAR system 26 be accessible by a floor brokerinputting a broker-specific identifier therein. The broker-specificidentifier is preferably a personal identification number (PIN) or othercoded identifier known and specific to the floor broker. Once accessedby the floor broker, the PAR system 26 terminals, for example, allow afloor broker to select an order from the workstation and receive anelectronic trading card or template on which the floor broker may entertrade information such as its volume, price, opposing market makers, orthe like. When a floor broker completes an electronic template, thefloor broker can then execute a trade electronically with the touch of afinger on the couch screen interface. The PAR system 26 then transmitsthe completed order, also referred to as a “fill,” back to the ORS 12.The ORS 12 can then mark the completed order with the broker'sbroker-specific identifier to associate a particular order with aspecific broker. This benefits the broker by permitting the broker todemonstrate which orders she handled so that a charge may be passed onto the customer. The PAR 26 may be a fixed workstation or a mobileworkstation in the form of a hand-held unit.

When a trade is completed, whether on the floor in open outcry andentered into PAR 26 or automatically executed through the electronictrade engine 24, the fill information is sent through the electronictrade engine 24 and ORS 12. ORS 12 passes the fill information to themember firm systems and to a continuous trade match (CTM) system 38which matches the buy side and sell side of a trade which, in turn,forwards the matched trades to the Options Clearing Corporation (OCC)40, a third party organization that will verify that all trades properlyclear. The electronic trade engine 24 also sends quote and sale updateinformation through an internal distribution system 42 that will refreshdisplay screens within the exchange 10 and format the information forsubmission to a quote dissemination service such as the Options PriceReporting Authority (OPRA) 44.

As illustrated in FIG. 2, an electronic trade engine 24 contains a tradeprocessor 30 that analyzes and manipulates orders according to matchingrules 32 stored in the database in communication with the tradeprocessor 30, as described in co-pending U.S. patent application Ser.No. 10/423,201, and U.S. Provisional Application No. 60/632,726, both ofwhich are incorporated herein by reference. Also included in theelectronic trade engine is the electronic book (EBOOK) 34 of orders andquotes with which incoming orders to buy or sell are matched with quotesand orders resting on the EBOOK 34 according to the matching rules 32.In an embodiment, upon a match, the electronic trade engine 24 will markthe matched order or quote with the broker-specific identifier so thatthe broker sending the order or quote information can be identified. Theelectronic trade engine 24 may be a stand-alone or distributed computersystem. Any of a number of hardware and software combinations configuredto execute the trading methods described below may be used for theelectronic trade engine 24. In one embodiment, the electronic tradeengine 24 may be a server cluster consisting of servers available fromSun Microsystems, Inc., Fujitsu Ltd. or other known computer equipmentmanufacturers. The EBOOK 34 portion of the electronic trade engine 24may be implemented with Oracle database software and may reside on oneor more of the servers comprising the electronic trade engine 24. Therules database 32 may be C++ or java-based programming accessible by, orexecutable by, the trade processor 30.

When a trade is completed, whether on the floor in open outcry andentered into PAR 26 or automatically executed through the electronictrade engine 24, the fill information is sent through the electronictrade engine 24 and ORS 12. ORS 12 passes the fill information to themember firm systems and to a continuous trade match (CTM) system 38which matches the buy side and sell side of a trade which, in turn,forwards the matched trades to the Options Clearing Corporation (OCC)40, a third party organization that will verify that all trades properlyclear. The electronic trade engine 24 also sends quote and sale updateinformation through an internal distribution system 42 that will refreshdisplay screens within the exchange 10 and format the information forsubmission to a quote dissemination service such as the Options PriceReporting Authority (OPRA) 44.

The Auction Process

In accordance with an embodiment of the present invention, selectedorders received by the electronic trade engine 24 will be auctionedbased on rules described for each auction-type.

It is preferred that the auction process will commence when the order isreceived at the electronic trade engine 24. To start the auction, theelectronic trade engine 24 will disseminate a new Request for Price(RFP) message through an Application Program Interface (API), whichspecifies the communication method and messages for one computer systemto communicate with another, between the electronic trade engine 24 andmember firm systems 14 and/or other financial market participants thatwill indicate the minimum price, side and size of the order thatinitiated the auction and any contingency, if required.

It is preferred that the RFP messages be disseminated to those quotersthat are quoting any series in the underlying stock at the time the RFPis sent and the firm initiating the auction, if the order was forinternalization. It is further preferred that responses to the RFPmessages be “blind,” i.e., they will not be included in thetop-of-the-market quotes being disseminated to OPRA 44 and the auctionresults will not be published through the API.

A response to the auction will not replace the user's quote, since theresponses are one-sided. The responses will be treated like Immediate orCancel (IOC) orders and will have a time to live equal to the auctionresponse time. Users will be able to respond at multiple prices to theRFP. Responses may be cancelled or cancel/replaced during the auctionperiod. Responses will not be routed through the ORS 12.

The auction will start immediately upon receipt of the order and will belive for a random period of time between M and N seconds, where M and Nmay be the same. The time period is modifiable and preferably short induration, for example between 2 and 3 seconds. At the end of the auctionperiod, the original order will be filled at the best price(s) availablefrom the auction. If the order cannot be filled at a price equal to orbetter than when the order arrived, the order may route to the PAR 26.

Further, the order will be allocated according to a selected allocationalgorithm. Allocation of the order to RFP respondents and quoters ispreferably performed through different mechanisms depending on the typeof the auction, i.e. internalization orders will be allocateddifferently than complex orders. These mechanisms described in detailbelow with respect to the sections relating to the auction-type.

It is further preferred that all auction information, including the RFPand all of the responses, will be stored in data tables, such as Oracletables, and will be available in market replay. Additionally, quotelocks and quote triggers preferably end when the auction starts.

The parameters detailed herein are preferably provided within theelectronic trade engine 24, unless otherwise stated. It is furtherpreferred that the allocation algorithm be configurable by class and/orby auction-type. For example, matching algorithms can be used toallocate an incoming order to participants based on the number ofparticipants and the order size each participant represents. In onematching algorithm, referred to herein as the Ultimate MatchingAlgorithm (UMA), orders are allocated to the multiple marketparticipants quoting at the same price based on two components: an ‘A’component, or parity factor, and a ‘B’ component, or pro rata/depth ofliquidity factor. The parity factor of the matching algorithm treats asequal all market participants quoting at the relevant best bid or offer(BBO). Thus, if there were four market participants quoting or biddingat the best price, each would be assigned 25 percent for the paritycomponent of the matching algorithm. Viewed in conjunction with the prorata factor of the algorithm, the parity component of the algorithmprovides incentive to market participants to quote at a better pricethan their competitors even though they may have a smaller quote sizethan other market participants quoting at the BBO.

The second component of UMA rewards those quoting larger sizes at thebest price by providing the market participants a pro rata componentbased on the percentage of the volume of that market participant's quotesize with reference to the sum of the total of all quote sizes at thebest price. For example, if the disseminated quote represents the quotesof market makers x, y, and z who quote for 20, 30, and 50 contractsrespectively, then the percentages assigned under the pro rata componentare 20% for x, 30% for y, and 50% for z. The final allocation may thenbe determined by multiplying the average of the A and B components bythe size of the incoming order available. In one embodiment, thematching algorithm described above produces the following equation:

${{{Participant}'}s\mspace{14mu}{allocation}\mspace{14mu}{of}\mspace{14mu}{incoming}\mspace{14mu}{order}} = {{incoming}\mspace{14mu}{order}\mspace{14mu}{size} \times \left\lbrack \frac{\frac{1}{{number}\mspace{14mu}{of}\mspace{14mu}{participants}} + \frac{{participant}\mspace{14mu}{quote}\mspace{14mu}{size}}{\sum{{participant}\mspace{14mu}{quote}\mspace{14mu}{sizes}}}}{2} \right\rbrack}$

Another matching algorithm, referred to herein as the Capped UltimateMatching Algorithm (CUMA), may be implemented. In CUMA, the algorithmmay be the same as UMA with the added feature that certain participantsare limited in the size of their order that will be used to calculatethe ‘B’ component of the equation. For example participants such as InCrowd Market Makers (ICMs) may be capped in this way so that, afterother participants have already entered their order or quotes, the ICMcannot inflate the size of its order to obtain a greater pro rataweighting (and thus greater allocation) of the available order.

The length of the auction is also preferably configurable byauction-type and/or class and preferably includes parameters M and Nseconds. The minimum allowable increment is preferably one penny.Generally, auctions performed in accordance with the present inventionwill be in penny increments, even though regular quoting is allowed onlyin nickel and dime increments. Minimum and maximum order size parametersfor each type of auction are on a firm/class/origin basis. If an orderdoes not meet these requirements, the order is routed back to theelectronic trade engine 24 without any corresponding firm information.The order will then be routed based on parameters for standard orders.Additionally, a minimum number of quoters may be required to start anauction. In such a situation, a parameter that can be set for each classand auction-type indicating the minimum number of quoters is required. Afurther parameter that includes ticks away from the national best bid oroffer (NBBO) can be provided so that when the exchange is not the NBBO,these orders can either route to the electronic trade engine 24 for anauction or route to the PAR 26 for handling in open outcry. Parametersare preferably available that permit the RFP messages to be distributedto a larger audience, such as all who subscribe to the message andallowing subscription by roles, i.e., all market makers 18, all marketmakers assigned to the class in MPP, all brokers, and the like.

In another embodiment, the electronic trade engine 24 can calculate thebest bid or offer (BBO) from among all the quotes and orders enteredand, when the exchange is at the NBBO, an incoming marketable order willbe stopped at the exchange's BBO and auctioned for price improvement.The origins, order size and classes eligible for auction are preferablyconfigurable. The starting price for the auction will preferably be theBBO/NBBO. Market makers 18 responding at the NBBO will only trade ifthere was not enough NBBO size at the start of the auction to fill theentire order.

The auction message will be disseminated to all market makers 18 quotingthe class, and may additionally be distributed to other members thathave orders resting at the top of the market as well.

At the end of the auction period, market makers 18 that were on the BBOat the start of the auction will have priority over those who were notat the BBO. It is preferred that priority be afforded only up to thequoters' original size. Additionally, DPMs, eDPMs and/or Preferred DPMspreferably retain a participation right if they were at the BBO and onthe final auction price.

If there is not enough In Crowd Market Maker (ICM) size (quotes plusorders sent by floor-based market makers (ICMs) that function asone-sided quotes, or ‘I’ orders) on the BBO to cover the firm quoteobligation for the incoming order, an auction will not be started. Anauction will be started if the entire displayed size is from ICMs, butis still not large enough to fill the order since the firm quoteobligation is the displayed size.

Further, to provide the stop for the auctioned order, the system willnot allow quoters in the series to move their respective quotes on theside being auctioned. ‘I’ orders are preferably treated like quotes.Quote updates may be queued as they are in quote trigger situations.

Additionally, the auction may end early (and trade against the existingauction responses and BBO size) for the following reasons:

1. An incoming quote or ‘I’ order locks or crosses the displayed market;

2. An opposite side order (not an ‘I’ order) that is tradable againstthe auctioned order and equal to or greater than the size of the order.If it is smaller than the order size it will trade against the auctionedorder and the auction will continue for the remainder of the order; or

3. A same side marketable order. This order will trade against anyremaining responses to the previous auction and then an auction willstart for it, if appropriate.

Complex Orders

A complex order is an order that includes more than one series or atleast one series coupled with another security. Incoming complex orderswill first route to the electronic trade engine 24 where thetop-of-the-spread market will be added to the order. The order willroute to the ORS 12 where it will follow firm/class/origin routingparameters. If the firm/class/origin routing parameters sent to theelectronic trade engine 24 are not met, the order will be routed to thePAR 26 or BART 22 for manual handling. The order information willinclude the top-of-the-spread market from the electronic trade engine24. The PAR 26 will add this information to the spread order ticket.Additionally, the PAR 26 user may query the electronic trade engine 24to obtain the top-of-the-spread-market.

If the order does meet the firm/class routing parameters to send to theelectronic trade engine 24, the ORS 12 will route the order to theelectronic trade engine 24. The electronic trade engine 24 willdetermine if the order is eligible for auction based on the complexorder auction parameters. If the order is not eligible it will be routedback to ORS 12 and handled as described above.

Certain types of incoming complex orders that are marketable against theleg quotes or the top-of-the-spread market will be eligible for theauction. The system 10 will determine whether they are eligible based onmarketability and spread-type. The system 10 is preferably configurableto allow or disallow any of the following spread-types:

Vertical spread: buy a strike, sell another strike, same expirationmonth, all calls or all puts.

Calendar spread: buy a strike, sell same strike, different expirationmonths, all calls or all puts.

Diagonal spread: buy a strike, sell a different strike, differentexpiration months, all calls or all puts.

Combo spread: buy call, sell put or reverse, either same or differentstrike, same or different expiration month.

Butterfly spread: buy 1 at a strike, sell 2 at another strike, buy 1 atanother strike, (or reverse) all calls or all puts, same expirationmonth.

Box spread: buy call/sell put at a strike, sell call/buy put at anotherstrike, same expiration month.

Straddle/Strangle: buy call, buy put (or reverse), same strikes(straddle), different strikes (strangle).

Gut Strangles: a subset of regular strangles where both strikes arein-the-money.

Ratio spread: buy 1 at one strike, sell 2 at another strike, sameexpiration month, all calls or all puts.

The system 10 checks for marketability against the leg quotes or aresting spread order. A parameter is preferably available that willallow the order to route to auction if the order is N ticks away fromthe exchange market. When the marketable complex order arrives at theelectronic trade engine 24, the auction process described above will beinitiated. The starting auction price will be the better of the exchangespread market, the customer's limit price or the limit price on anyresting spread orders. If the complex order cannot be filled at a priceat least equal to the original market when the order arrived, the spreadorder will route to the ORS 12 and then to the PAR 26.

Allocation of the complex order will use a configured allocationalgorithm and are preferably in the priority order. A complex orderauction will end if a marketable order is received for any of the legsof the complex order.

Internalization

The internalization of options orders generally refers to firms tradingas counter-parties with their customer orders, or firms routing toaffiliated specialists, and reciprocal order routing agreements.

Orders to be internalized are preferably marked by the firm, asdiscussed in detail below.

The internalizing firm can set the price for its side of the order inone of three ways: 1) the firm can specify a limit price; 2) for automatch, described below; and 3) as an order that will guarantee thestarting price of the auction. Alternatively, for certain types ofinternalized orders, the firm may participate in the auction as aquoter. For example, orders marked with T (described below) will resultin the auction commencing if the quoter associated with the targetedfirm is on the market.

The starting price of the auction will be determined through a parameterthat will allow the starting price of the auction to be at either: 1)the better of the NBBO, the customer's limit price or the firm's limitprice; or 2) the better of one tick better than the NBBO, the customer'slimit price or the firm's limit price. This parameter is preferablyconfigurable by order size. For example, orders of 50 contracts or lessmight require that the auction start at a price 1 tick better than theNBBO, while auctions for orders greater than 50 contracts might start atthe NBBO.

It is further preferred that internalizing firms will be guaranteed apercentage of the order if the firms are at the final price of theauction. The percentage is a configurable parameter. For the purposes ofillustration only, a percentage of 40% as the internalization percentageis employed, however any percentage (N %) may be used in accordance withthe present invention. The internalizing firm sending the orderguarantees 100% of the order at the starting point of the auction. Theelectronic trade engine 24 will ensure that the firm is guaranteeing theappropriate size and price prior to starting the auction. If theseconditions are not met, an auction will not be started and the originalorder will follow standard routing parameters and the firm side of theorder will be cancelled.

Additionally, the internalizing firm preferably has an option, bymarking the original order, to have the electronic trade engine 24respond to the RFP for the firm. For these orders, the electronic tradeengine 24 will automatically match the best price quoted by any otherparticipant in the RFP process. If the firm chooses this option therewill be no limit as to the amount that the firm may have to step up tomatch other participants. The step-up amount will correspond to the sizethe step-up amount of the other market participants. For example if themarket is 1.00-1.20 and an RFP is initiated by a 1.20 buy limit orderfor 100 contracts and at the end of the RFP period a market maker hasstepped up to 1.15 for 10 contracts the internalizing firm will trade 10contracts at 1.15 along with the market maker and then be allocated 40%of the remaining 80 contracts traded at 1.20. If there are step-ups atmore than one price point the internalizing firm will match at eachprice for the appropriate size.

If the internalizing firm does not mark the order as a matching orderthe internalizing firm can either provide a limit price at which thatfirm is willing to trade or mark the order indicating that the firm iswilling to participate at the starting auction price. If the auctionends at a better price than the firm's limit, the firm will notparticipate.

When the auction is complete the order will be allocated as follows: Ifthe internalizing firm has not selected auto-match, the order will beallocated at each price point to the RFP respondents at those pricepoints. For example, if the internalizing firm has a limit price thatwould allow it to participate it will receive 40% of the remainder ofthe order at the firm's limit price(s). If any part of the order isfilled at the original market the following priority will beaccorded: 1) customers resting at that price; 2) the internalizing firmwill receive 40% of the remainder of the order; 3) any quoters who wereat that market when the original order arrived and were there when theauction ended; and 4) any RFP respondents who responded at the originalmarket, any new quoters at that market and the remainder of theinternalizing firm's order. If the internalizing firm did selectauto-match the above will occur with the exception that theinternalizing firm will receive an allocation at each price point.

The configured allocation algorithm will be used to allocate torespondents at each price. For example, if the internalizing firm doesnot receive 40% of the order, the DPM complex will receive itsallocation. If the internalizing firm does receive 40% of the order, theDPM complex will participate using the configured allocation algorithmand will not receive any further guarantee. If at the end of the auctionany ICMs have move their quotes and are now quoting at the best price,they will be included in the allocation as though they were a respondentto the RFP. If a single market maker had a quote and an RFP response atthe same price, the quote and the response will be combined forallocation. This is to prevent the market maker from obtaining two ‘A’components in CUMA or UMA. If the internalizing firm also happens to bea quoter in the class and is part of the RFP response or has posted aquote that would participate, that quoter will not participate in theauction.

If a marketable non-ICM order is received at the electronic trade engine24 during the RFP period on either side of the market the RFP periodwill end automatically and then the incoming order will be processedagainst the existing quotes. If a non-marketable non-ICM order isreceived at the electronic trade engine 24 during the RFP period on theopposite side of the order being auctioned that order will participatein the auction allocation if it is at the best price. If it is acustomer order it will receive priority. Since the internalizing firm isguaranteeing the entire order, if the order cannot be filled by theother market participants at a price at least equal to the limit priceof the internalizing firm order, the internalizing firm will fill anyremainder of the order. The order of allocation is preferablyconfigurable to allow as much flexibility as required.

Complex Orders with Stock Auction

Complex orders with stock preferably route to the auction using the samerouting parameters as standard complex orders. The electronic tradeengine 24 will book these orders or auction them as appropriate.

The auction will work in the same manner as described herein withrespect to other auctions, with the exception that these orders will notbe executable against the legs. These orders will only be executableagainst opposite side orders or responses to the RFP. Using theunderlying stock price, the options price and the trade price for theorder, the electronic trade engine 24 will calculate the stock price tosend a stock print to another exchange, such as the CBOE stock exchange.The second exchange will determine if it can print the trade at therequested price.

If the second exchange determines that it can print the trade, the tradewill be printed and a confirmation will route back to the first exchangeand the electronic trade engine 24 will consummate the trade between theRFP respondents and the resting order. If the second exchange determinesthat it cannot print the trade, a reject will be routed back to thefirst exchange. The electronic trade engine 24 will have to then attemptthe stock print at a new stock price. This auction is preferablyavailable for all stock option orders including those with more than oneoptions leg and those with a price for both the stock and the order. Oddlots on the stock order will not be accepted. Furthermore, an assumptionis made that the option print can be at or within the first exchange'smarket and will be sent to a quote dissemination service such as theOptions Price Reporting Authority (OPRA) 44 with a spread indicator. Forunderlying stock information, the electronic trade engine 24 willpreferably use the stock feed being sent from a system that is used toreceive and distribute the various outside data feeds (underlyingsecurity prices, options quotes, etc.) necessary for maintainingaccurate displays on the trading floor (TIPS).

New Allocation Method for Auctions

The following is a new allocation methodology for auctions in accordancewith the present invention.

For all auctions (either at the same or better price), priority is asfollows:

1. Quoters in the legs that can fill the order in ratio;

2. Customers at the best spread market; and

3. RFP responses and non-customers at the best spread market.

As has been described above, the hybrid exchange system mergeselectronic and open outcry trading models while at the same timeproviding an automated auction for internalization and complex orders.

Although the system and methods described herein preferably relate to ahybrid system incorporating and involving active participation from atrading floor and a screen-based electronic trading crowd, many of theprocedures described may be applied to an exclusively electronic,screen-based exchange that does not include floor based, open-outcrytrading. As will be appreciated by those of ordinary skill in the art,mechanisms for the providing an automated auction for internalizationand complex orders and other features described above may all bemodified for application to electronic-only trading within the purviewand scope of the present invention.

The matter set forth in the foregoing description and accompanyingdrawings is offered by way of illustration only and not as a limitation.While particular embodiments have been shown and described, it will beapparent to those skilled in the art that changes and modifications maybe made without departing from the broader aspects of applicants'contribution. It is therefore intended that the foregoing detaileddescription be regarded as illustrative rather than limiting, and thatit be understood that it is the following claims, including allequivalents, that are intended to define the scope of this invention

1. A method of providing an automated auction for internalization forthe purchase or sale of securities or derivatives in an exchangeconfigured for trading securities or derivatives, the method comprising:receiving an order marked for processing in an internalization auctionat an electronic trade engine; the electronic trade engine disseminatinga request for price message from the electronic trade engine to at leastone user in response to receiving the order; receiving a one-sidedresponse message representative of a participant-type at the electronictrade engine in response to the request for price message from the atleast one user, wherein the electronic trade engine preventsdissemination of the one-sided response message to an external reportingentity and an order routing system for the exchange; the electronictrade engine selecting an allocation algorithm from a plurality ofallocation algorithms, each allocation algorithm representative of anauction-type and having at least one starting price associatedtherewith; the electronic trade engine initiating the selectedallocation algorithm, wherein the auction occurs for a predeterminedperiod of time; and the electronic trade engine allocating the orderaccording to the participant-type upon termination of the selectedauction.
 2. The method according to claim 1, wherein the request forprice message includes at least one of a minimum price data, side data,size of the order data or contingency data.
 3. The method according toclaim 1, wherein the auction type is a complex order auction.
 4. Themethod according to claim 1 wherein the auction commences substantiallyinstantaneously upon receipt of the one-sided response message.
 5. Themethod according to claim 3, wherein the at least one starting price isa price equal to the better of an exchange spread market, a customerlimit price or a limit price on any resting spread orders.
 6. The methodaccording to claim 4, wherein the at least one starting price is a priceequal to the better of the national best bid or offer, a customer limitprice or a firm limit price.
 7. The method according to claim 4, whereinthe at least one starting price is a price equal to the better of onetick better than the national best bid or offer, a customer limit priceor a firm limit price.
 8. The method according to claim 1 wherein the atleast one starting price is a price equal to the better of the best bidor offer or national best bid or offer prevailing across multiplemarkets for a security or derivative.
 9. The method according to claim 1wherein the one-sided response message comprises multiple prices. 10.The method according to claim 1, wherein the participant-type isselected from the group consisting of customers, market makers, firmsand brokers.
 11. The method according to claim 1, wherein the order isfurther allocated based on the number of participants and the size eachparticipant represents.
 12. The method according to claim 3, wherein thecomplex order auction is configurable to allow or disallow at least onespread type.
 13. The method according to claim 12, wherein the at leastone spread type is selected from the group consisting of verticalspread, calendar spread, diagonal spread, combo spread, butterflyspread, box spread, straddle, strangle, gut strangles, and ratio spread.